Question

Problem:

      Suppose that the demand for Cod Liver Oil (CLO) can be written Q_D =5000-2P (so, the inverse demand curve for CLO is P=2500-0.5Q_D), where P is the price per ton (in dollars) of CLO and Q_D is the quantity demanded (in tons) in a period.

1. Use Excel Scatterplots to draw (i) the demand curve and (ii) the corresponding total revenue curve for this market (in two separate diagrams).
2. Calculate price elasticity of demand (using the point elasticity formula) at the following amounts of CLO along this demand curve: Q_D=4000, Q_D =2500, Q_D =1000.
3. Calculate total revenue from sales in this market at each of these quantities: Q_D=4000, Q_D =2500, Q_D =1000.
4. Assume that demand will decrease based on a parallel shift of the demand curve. Explain what will happen to elasticity at Q_D=2500 (will it increase or decrease and why?). What will happen to total revenue at this quantity (will it increase or decrease and why?). Will the maximum total revenue for the market be achieved at a greater or a smaller quantity than Q_D=2500?

Answer 1

For part A take the different values of P & Q that satisfy the demand equation.

we will get,

Y-intercept (Price) => X = 0 => Y = 2500

X-intercept (Q) => Y =0 => X = 5000

graph will be---